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Japan has often been described as a "network society." Business networks are said to succeed as alternatives to markets and hierarchies through fostering cooperation and competition among members. Interpretations of existing business networks in Japan share two main characteristics. First, studies have focused on networks between the central state and big business. Second, existing theories fail to examine underlying power asymmetries in business networks. These power asymmetries have been masked by assumptions of "trusting" relations between large firms and small. In essence, in Japan most networks are in fact hierarchies.Contrary to existing interpretations, the most innovative business networks have been those formed by small and medium size firms, independent from both big business and the central state. These networks have been most successful while serving as "enabling institutions" for firms in which local governments play a supportive role.The paper begins by reviewing sources of network formation. Second, I show that emerging network forms are proving to be an important alternative to hierarchy in Japan. I examine three local business networks: Kyoto's "Kiseiren," Osaka's "TOPS Higashi Osaka," and Tokyo's "O-net." The most successful networks, measured in terms of new product creation and increased sales, are those formed on the initiative of firms, independently of the state and big business. Local governments play an informal, supporting role in these successful networks.